CCP Study Shows IRS “almost universally hostile towards nonprofits” for decades

Alexandria, VA – The Center for Competitive Politics (CCP) today released a report by Allison R. Hayward, an election law attorney in California, entitled “Eternal Inconsistency,” on the history of how the IRS has, according to the report, “been almost universally hostile toward nonprofits” for nearly a century.

To read “Eternal Inconsistency: The Stunning Variability in, and Expedient Motives Behind the Tax Regulation of Nonprofit Advocacy Groups,” click here or go to https://www.ifs.org/wp-content/uploads/2015/06/Hayward_Eternal-Inconsistency.pdf

“Lois Lerner is not the first IRS official hostile to speech rights, but it’s time she was the last,” said CCP President David Keating. “Allison Hayward’s study shows we can’t trust the IRS to act as the speech police.”

Hayward concludes the paper urging readers to “draw several lessons from this history.  First, the Internal Revenue Service, while effective at raising revenue, is a poor agency to task with regulating advocacy organizations, especially those that cannot offer donors a tax deduction. Only trivial amounts of revenue are at stake. Whether a certain message, or viewpoint, or advertisement, or tone is proper should not be a concern of the tax man. Second, Congress must resist the temptation to even political scores through tax legislation. Not only is it poor governance, but it rarely works. Finally, the courts should remain vigilant in protecting groups from Service overreach and congressional mischief. While it remains a canard of legal analysis that nobody has a right to avoid paying taxes, in this context – again – revenue is not the issue. Courts should feel free to identify and excise laws, even tax laws, which abridge political freedoms.”

In the study, Hayward analyzes the historical roots of the IRS’s recent scandals, and discusses how:

• The IRS scandal is just the latest in a series of clashes between the agency and nonprofit advocacy groups.
• Congress writes tax law to address short-term political goals, often ignoring long-term problems.
• Laws governing tax treatment of nonprofits are often unclear.
• The IRS has a history of pushing the limits of its statutory authority to regulate groups exercising First Amendment rights.
• Tax collectors apply regulations strictly and examine groups inconsistently and selectively, with a focus on controversial groups.
• Tax collectors often interpret exemptions much more narrowly than Congress intended.
• Congress or the courts have often had to step in to secure the rights of nonprofit groups against IRS overreach.
• Technical burdens and legal uncertainty have historically been major obstacles for nonprofit advocacy groups seeking tax-exempt status.
• The IRS is not able to effectively regulate nonprofit groups that engage in political speech. 

Executive Summary:

• A 1909 law imposing a tax on for-profit corporations specifically exempted nonprofits “operated exclusively for religious, charitable or educational purposes.” This is the genesis of the term “exclusively” in the tax code. However, it was never intended to be absolute: a Senator speaking for the bill assured colleagues that charities could engage in other activities, such as providing insurance, and remain exempt.
• The term “social welfare” first appeared in the 1913 income tax law. The term may have been included to quell suspicions that the language of the 1913 income tax was far broader than previous tax laws, and might unintentionally apply to chambers of commerce, boards of trade, and other nonprofits.
• Congress decided in 1917 to allow tax deductions for donations to certain nonprofits, intensifying the debate over the tax treatment of advocacy organizations.
• The Treasury Department began denying tax-exempt status and deductions on contributions to groups “formed to disseminate controversial or partisan propaganda” in 1919. Tax collectors were selective and inconsistent in deeming groups propagandist. Some organizations with policy goals maintained their exemption and deductions, such as the National Rifle Association, while others, such as the World League Against Alcoholism and Margaret Sanger’s organization (which would later become Planned Parenthood), were denied. Tax collectors generally applied regulations strictly and expansively. For example, advocacy of economic change “contrary to the present order” would disqualify a group from exemption.
• The Revenue Act of 1934 shifted the focus of evaluation away from an organization’s tone or purpose, to whether political activity constituted a “substantial” portion of its activity. This was motivated in part by animus towards one group in particular, the National Economy League. However, the 1934 law did not define “substantial” and the trend of inconsistent enforcement and overreach continued.
• During this period, courts repeatedly rebuked the IRS’s tendency to refuse to allow exemptions and deductions to nonprofit advocacy groups.
• A 1951 scandal where the IRS was revealed to have accepted payments in exchange for lenient treatment led to calls for reform. IRS agents were subsequently placed under the civil service.
• Congress revisited the Internal Revenue Code in 1953, leading to the passage of the 1954 Revenue Act. Through an amendment offered by Senator Lyndon Johnson, the law included language explicitly prohibiting charitable and educational groups exempt under what became Section 501(c)(3) from engaging in political activity. No such language appeared in the section governing social welfare organizations.
• The IRS struggled to write regulations implementing the 1954 law. A rule proposed in 1956 was later withdrawn, and a final rule was not completed until 1959, with significant revisions. The 1959 regulation set the stage for modern disputes over the tax treatment of nonprofit advocacy groups, stating that a group is “operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community.”
• The reason for the changes in the 1959 version is not clear. The awkward phrasing in the 1959 language suggests it was the product of compromise. It is evident, however, that the new Rule offered clearer and more precise guidance (the invention of “action organizations” for instance), perhaps in response to criticisms that the first draft was vague. It also struck directly at Service interpretations that barred groups with social welfare purposes and groups that sought to influence public opinion from 501(c)(3) status.  No transcripts or records survive from the IRS hearings held to consider the final rules. One newspaper account of an April 16, 1959 hearing reported only that attendees were critical of the rules, and feared they would deny exemptions to groups that were deemed exempt under the former rules.